20 reasons why businesses fail and how to avoid them


20 reasons why businesses fail and how to avoid them

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5 minute read

660,000 new companies are registered in the UK every year. That’s the same as every man, woman and child in Glasgow starting a new business every year. 60% of those new businesses will close within three years and 20% will shut down within just 12 months. So why do businesses fail?

Obviously, nobody sets out to have a failed business. You will do anything within reason to survive, prosper and beat the odds. The road to successful entrepreneurship is littered with the bones of failed companies. If it was easy and simple, everyone would be doing it. This blog will help you to understand the obstacles and then avoid them. If you don’t pay attention to these risks, your journey through the world of business will feel very bumpy indeed. Enthusiasm will fall away. Your business “vehicle” will end up forlorn and abandoned by the roadside.

The Top 20 reasons why businesses fail

1. Your start-up may be trying to produce a solution to solve a problem that doesn’t really exist. A very common experience. Any viewer of the Dragon’s Den will be familiar with the enthusiastic entrepreneur who invested their life savings in a solution nobody needs. Don’t rely on family and friends to be brutally honest with you.

2. There is a business mantra that goes like this: turnover is vanity, profits are sanity, but cash is king. Think of cash flow (the flow is vital) as a fast-moving river. As soon as that river turns into a stream and then dries up, you’re in trouble. The #2 reason for business failure is running out of cash.

3. In the first stage, many start-ups are essentially one-man or one-woman operations, and a single pair of shoulders can only carry so much weight. You need help. Teams are built, staff are recruited. The problem is, they aren’t replicas of you. They don’t share the same vision, passion or appetite. You finally fall out, people leave. The business founders. The end.

4. Have you ever experienced the “red car” effect? You buy a new red car of a certain model, thinking it's a one-off, and your taste is excellent. As you drive home from the dealership in your after-purchase glow, it isn’t long before you spot a few of exactly the same colour and model. Unfortunately, what’s true for cars may also be true of your prized business concept. Maybe others have a similar vision, and maybe (whisper it) they are even doing it better than you. You find yourself unable to compete: goodbye sales, goodbye business.

5. Beauty and perfection come at a cost. No plastic handles for you; only polished bronze. You invest heavily in design and production quality. Your offering is niche and special. How disappointing, then, when those ungrateful potential clients refuse to beat a path to your door. The expensive product or service sits unused and unloved. Even quarter one revenues aren’t met.

6. The exact opposite of failure #5. If your aim is for turnover, profits and quick success, you may cut corners. High sales are not much use when 95% are sent back. Developing a poor product is failure #6.

7. Of the thousands of new business start-ups each year, how many of the owners have business acumen? Everyone has a great idea that will make them millions. Few have a plan, strategy and financial backing. Always have a plan B, a fallback option. Without one, your business could fail.

8. Did you get a degree in marketing from a leading university? Probably not. Your product/service may be brilliant but check out your high street and the internet – there’s a lot of stiff competition and headwinds out there. Who are your ideal buyers? What’s the best price point? How do you reach them? Which channel is best? Launching a start-up without basic market awareness, or at least access to someone who does have it, is an ideal way to lose a lot of money, very fast. Get this bit wrong. Fail.

9. How easy the businessperson’s life could be if it weren’t for those pesky creatures called customers. Complaints, returns, questions, refunds. Don’t the customers realise you are stocktaking? Or on a team-building away day? At a conference? Having a board meeting? Catching up with suppliers? Dealing with staff and HR issues? Fair or not, you need to have your eye on the ball pretty much all the time. Too much to ask? Then, goodbye customers, it was nice knowing you.

10. Just ship it. Let the marketplace identify your product faults — the 80% entrepreneur rule. The marketplace is very time-sensitive to your business idea. Sir Clive Sinclair’s C5 electric “vehicle” was produced in 1985. Fail. The market wasn't ready. Elon Musk and Tesla is another story. If you are too early to market (too unusual and different), you can fail. If you are too late (crowded market) you can also fail.

This is the Top-10. More than enough to put people off. Why risk your life savings and the family home for just a vision or an idea? The downside is steep, deep and real. The fact is, not many people will see the process successfully through to the end. But could you be one of them?

Well, maybe you are. You’ve got your ducks in a row, your bases covered. You’re full of vim and vigour, with a supportive family and a financial safety-net.

The following graphic from the ONS shows where in the UK businesses have thrived and prospered in the past.

why businesses fail

11. Do you like bright and shiny new things? Innovative services and products? The latest must-have gadgets? If this is you, then focus may be an issue for you and your team. If you constantly move the goalposts, changing objectives from one day to the next, your team will get confused and demoralised. Losing focus is fail #11.

12. Who is backing you financially? The bank, your family, stakeholders or business partners? There will be periods when your drive and vision are unaligned with those of your backers. Tension fills the void; differences of opinion. If other people have skin in your game, you can't ignore them.

13. Sometimes your business needs to pivot. Stop doing this, start doing that — a big change of direction, product, service or marketplace. The point is, reorientations and major strategic shifts need to be based on planning and hard evidence. If you jump into it, trouble will soon come knocking.

14. Are you in business for money or ideals? It’s no crime to be profit-oriented, but if this is you, and revenues fall away, your motivation is likely to go with them. Your passion will fade. You lose interest — the end.

15. Location, location, location. Where have you located your business? Do you need easy customer access, or are you digital-only? Can you hire the best talent based where you are? Expensive products served from an industrial estate won't help you.

16. You have burned through your first tranche and need more working capital. But there is little or no interest in funding you, or the terms are draconian. Investors are voting with their wallets.

17. I fought the law, and the law won. The Clash got it right. Try to avoid legal problems like the plague. Getting embroiled in litigation is another potential business killer. In fact, it rates position #17 on our list.

18. Lazy networking. You need as many people onside as you can get. Get out there and network. Tell your amazing story. If you don’t, your business won’t gain traction.

19. Tiredness can kill. What’s true on the motorway applies equally to life in the business fast lane. If you get burnout from exhaustion, your company will die.

20. The opposite of #13. Digging your heels in and not listening to good advice. Being a stubborn mule. You don't want to be proven wrong, so you don't pivot despite all the warning signals.

After reading a list like this, it’s a wonder any entrepreneur starts a business. But hope springs eternal.

The follow-up blog will explain the positive actions you can take to avoid these failings.

If you would like to talk about your business with a chartered financial planner, contact us today. 




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